Bar Study - Trusts

Front 1

What are the elements of an express trust?

Back 1

(1) a settlor with capacity to convey; (2) a present intent to create a trust; (3) a competent trustee with duties; (4) a definite beneficiary; (5) the same person must not be the sole beneficiary and the sole trustee; (6) the trust must be a present disposition in trust of specific property; and (7) the trust must have a valid trust purpose

Front 2

When must trusts be written and when may they be oral?

Back 2

An oral trust is valid unless a statute of frauds applies

Front 3

Is communication of intent to create a trust to the trustee necessary to create a trust of personal property?

Back 3

No. Intention to create a trust must be manifested by the settlor at a time when the settlor owned the property or prior to its conveyance, and that intent must be for the trust to take effect immediately, but the trustee need not have been informed

Front 4

What is the effect of precatory language on a trust's terms (ie. settlor's expression of hope or wish?

Back 4

Generally, these have no effect and do not create a trust, except if they are (1) definite and precise directions; (2) directions addressed to a fiduciary; (3) result in an 'unnatural' disposition of the property; or (4) extrinsic evidence shows the settlor previously supported the intended beneficiary

Front 5

How might a person accept a trusteeship?

Back 5

Acceptance occurs if the intended trustee (1) substantially complies with the acceptance terms or (2) accepts the trust property, exercises powers, or performed duties as a trustee

Front 6

May a person who has been offered a trusteeship acts to preserve the trust property, may they still have rejected appointment?

Back 6

Yes, provided he sends notice of rejection to the settlor or a qualified beneficiary

Front 7

What effect if a trustee fails to accept trusteeship within a reasonable amount of time?

Back 7

The trustee is presumed to have rejected trusteeship

Front 8

What are the grounds for removal of a trustee?

Back 8

A trustee may be removed for: (1) a serious breach of trust; (2) lack of cooperation among co-trustees; (3) unfitness, unwillingness, or persistent failure to administer; or (4) a substantial change in circumstances

Front 9

When might the date of acceptance of a trust relate back to the date of its formation?

Back 9

A testamentary trust is treated as being in existence as of the settlor's death; therefore, trustee may be liable for tort claims arising before acceptance

Front 10

How may a trustee resign?

Back 10

A trustee can resign by (1) giving 30 days' notice to the qualified beneficiaries, settlor (if living), and co-trustees; or (2) obtaining court approval

Front 11

Is acceptance by the beneficiary required for a valid trust?

Back 11

Yes, but acceptance by the beneficiary may take place after a valid trust is created and is generally presumed

Front 12

How might someone disclaim an interest in a trust?

Back 12

By filing a written instrument with the trustee

Front 13

By when must a beneficiary disclaim an interest in a trust?

Back 13

Disclaimer must be made within nine months of the interest's creation unless the beneficiary is under the age of 21 (in which case nine months after they reach 21)

Note: a beneficiary will be estopped from making a disclaimer if she has exercised any dominion or control over the interest or accepted any benefits under the trust.

Front 14

What are the definiteness requirements for a trust given as a class gift?

Back 14

At common law, the class must be reasonably definite. If the class is too broad, the trust becomes a power of appointment.

Under the UTC, settlor may empower a trustee to select beneficiaries from an indefinitely class (failure to exercise creates a resulting trust for settlor and settlor's successors)

Front 15

What if the definiteness requirement is not met with regard to trust beneficiaries?

Back 15

A resulting trust is created in favor of settlor and settlor's successors

Front 16

Must the property to be a trust res be in existence when the trust is made?

Back 16

Yes. A future interest, however, may be a trust res, as can expected future profits from an existing contract

Front 17

What if a condition attached to an interest in a trust is against public policy?

Back 17

(1) settlor's alternative desire controls if expressed.

(2) if the illegal condition is a condition subsequent, the condition is invalid, but the trust is valid

(3) if the illegal condition is a condition precedent, the preferred view is to hold the interest valid unless there is evidence that the settlor's wish would be to void the beneficiary's interest altogether if the condition is unenforceable

Front 18

What if a trust settlor manifests an intent to create a trust but only subsequently acquires the res?

Back 18

Nothing - for a trust to be created, the settlor must remanifest trust intent after acquiring the trust res.

Front 19

What is the procedure to create a trust inter vivos?

Back 19

An inter vivos trust can be created either by (1) a person declaring himself trustee for another or (2) by the transfer of property to another as trustee with the intent of creating a trust, which is manifested either by conduct (delivery) or by words (declaring oneself trustee).

Note: delivery is placing the trust property out of the settlor's control (unless the settlor serves as trustee)

Front 20

Do trusts require a writing?

Back 20

Sometimes. Trusts for personal property do not require a writing and may be established by clear and convincing evidence. A trust for land, however, requires a written instrument signed by the person entitled to impress the trust upon the property

Front 21

Is parole evidence admissible to clarify an ambiguity which appears on the face of a writing which creates a trust?

Back 21

Yes

Front 22

What are "secret trusts" and what effect do they have?

Back 22

Secret trusts are testamentary trusts which are made as gifts which are absolute on their face but which were made in reliance on the beneficiary's promise to hold the property in trust for another. If the intended beneficiary can demonstrate such reliance by clear and convincing extrinsic evidence, a constructive trust will be imposed on the property in favor of the intended trust beneficiary.

Front 23

For a "secret trust," when must the trust promise on which the settlor relied have been made?

Back 23

At any time - constructive trust will be imposed even if the will beneficiary did not make the promise until after the will was executed.

Front 24

In a "secret trust," what effect does it have if the trustee (actual beneficiary) never intended to keep her promise to convey the trust property to the intended beneficiary?

Back 24

None - it does not matter if the will beneficiary (intended trustee) intended to perform the promise; all that matters is that the testator relied on the promise.

Front 25

What is a "semi-secret" trust? What effect does it have?

Back 25

In a semi-secret trust, the will makes a gift in trust but fails to name the beneficiary. The gift fails, and the named trustee holds the property in a resulting trust.

Front 26

What are the two types of trust and what are the differences between them?

Back 26

Charitable trusts are different from private trusts because charitable trusts (1) must have indefinite beneficiaries; (2) may be perpetual; and (3) are subject to cy pres doctrine.

Front 27

What happens if a charitable trust's purpose or beneficiary is not specified in the trust instrument?

Back 27

The court may select a charitable purpose or beneficiary if none is specified in the trust instrument, provided that the selection is consistent with the settlor's ascertainable intention.

Front 28

Can the beneficiary of a charitable trust be a specific organization like the Red Cross or Humane Society? Why or why not?

Back 28

Yes, because although charitable trusts must have an indefinite beneficiary, the ultimate beneficiaries of a charitable organization's work are technically indefinite (even if the organization is specific in its purpose)

Front 29

What is an honorary trust - what effect does it have?

Back 29

An honorary trust is a trust for the benefit of a pet or for the maintenance of a burial place.

Under common law, there is no human beneficiary to enforce, so the trustee is "on her honor" to carry out the trust terms.

Under the UPC, the trust is enforceable by someone named in the trust instrument or appointed by the court - any excess property is returned to settlor or his successors unless the instrument provides otherwise

Front 30

How long is an honorary trust valid if it is valid?

Back 30

Under the common law, an honorary trust must merely comply with the Rule Against Perpetuities. Under the UTC, an honorary trust may last only 21 years if not for the care of an animal or for the life of the animal if the trust is for the care of an animal.

Front 31

May a trust beneficiary transfer or sell her interest in a trust?

Back 31

Yes, unless transfer is prohibited by statute or by the trust instrument. The assignee, however, is still subject to all previous conditions and limitations

Front 32

Can an insolvent trust beneficiary's creditors levy on the beneficiary's interest?

Back 32

Yes

Front 33

Is a trust beneficiary's interest subject to judicial sale?

Back 33

Yes, but to avoid this the court may order the trustee to pay the beneficiary's income to the creditors until the debt is satisfied.

Front 34

What is a spendthrift provision?

Back 34

A spendthrift precludes the beneficiary from voluntarily or involuntarily transferring her interest in the trust and his creditors are precluded from reaching it to satisfy their claims.

Front 35

When, if ever, may normal (non-government and non-spousal or child support) creditors of a trust beneficiary reach trust property where there is a spendthrift provision in the instrument?

Back 35

Only when income is paid to the trust beneficiary.

Note: a creditor may also reach mandatory distribution of income or principal if the trustee did not make it within a reasonable time.

Front 36

Does a purchaser of a trust interest from the original beneficiary where there is a spendthrift provision own the interest?

Back 36

No - in this case, the trustee has discretion to pay either the purchaser or the original beneficiary and may switch at any time. The purchaser may not enforce the trust.

Front 37

In what situations may a spendthrift provision not apply?

Back 37

A spendthrift provision cannot be used to shield the beneficiary from (1) his own creditors where the beneficiary is the settlor; (2) judgments or court orders for support or maintenance of the beneficiary's child, spouse, or former spouse; or (3) claims by the government.

Front 38

What factor determines whether person A or person B is the settlor, where it is ambiguous?

Back 38

The settlor is the person who furnishes compensation to the trustee for creation of the trust.

Front 39

What is a discretionary trust?

Back 39

A discretionary trust is one where the trustee is given discretion whether to apply or withhold payments of income or principal (or both) to the beneficiary.

Front 40

What are a creditor's rights with regard to a discretionary trust?

Back 40

Before trustee exercises his discretion to make payments to beneficiary, beneficiary's interest is not assignable and can't be reached by creditors. Creditors can attach the beneficiary's interest, but cannot compell the trustee to make distribution. Once trustee receives notice of attachment from the creditor, however, he must make any distributions he decides to make directly to the creditor unless the interest is protected by a spendtrhift provision.

Note: the court can still force the trustee to satisfy a judgment or order against the beneficiary for the support or maintenance of the beneficiary's child, spouse, or former spouse.

Front 41

What is a support trust?

Back 41

A support trust is a discretionary trust with a support standard.

Front 42

What are a creditor's rights to reach a support trust?

Back 42

Creditor has the same rights as in a discretionary trust situation: before trustee exercises his discretion to make payments to beneficiary, beneficiary's interest is not assignable and can't be reached by creditors. Creditors can attach the beneficiary's interest, but cannot compell the trustee to make distribution. Once trustee receives notice of attachment from the creditor, however, he must make any distributions he decides to make directly to the creditor unless the interest is protected by a spendtrhift provision.

Front 43

Is the beneficiary's interest in a support or discretionary trust transferrable?

Back 43

No.

Front 44

What type of trust is created by the language: "pay all of the income to A for his support?"

Back 44

A regular old trust under which beneficiary is due all income from the trust res. This is not a support trust.

Front 45

May a trust be terminated or modified by the settlor?

Back 45

Under the UTC, a settlor can revoke or amend a trust unless the terms expressly state that it is irrevocable. Under traditional common law, a trust is irrevocable unless the settlor expressly reserves the power to revoke or modify the trust.

Front 46

May a trust be terminated or modified by the beneficiaries?

Back 46

A trust may be terminated or modified (1) upon the consent of the settlor and all beneficiaries, even if the modification or termination conflicts with a material purpose of the trust, (2) on the consent of only all beneficiaries only if no material purpose of the trust would thereby be frustrated.

Note: this means that a trust cannot be ended early if there are any unborn or unascertained beneficiaries unless a party appointed to represent their interest also consents

Front 47

When, if ever, may a court modify a trust event?

Back 47

A court may modify a trust even without the consent of all beneficiaries if (1) the trust could have been terminated had all of the beneficiaries consented, and (ii) the interest of a beneficiary who does not consent will be adequately protected.

Front 48

What is the material purpose of a trust?

Back 48

Indicators of a material purpose include: (1) distributing property to a beneficiary at a designated age, which shows a purpose to keep property out of the beneficiary's hands until the designated age and (2) a spendthrift provision, which shows a purpose to protect the beneficiary from creditor's claims.

Front 49

How is trust property distributed if the trust is terminated by agreement of all beneficiaries?

Back 49

Where all beneficiaries consent to termination, the trustee distributes trust property as determined by the settlors.

Front 50

May a court terminate a trust early if not all beneficiaries agree that it should be terminated?

Back 50

Yes - a court may terminate or modify a trust early if not all beneficiaries agree that it should be terminated or modified if (1) the trust could have been modified if all beneficiaries had consented; and (2) the interests of any non-consenting beneficiaries will be adequately protected; OR (a) unanticipated circumstances threaten the purposes of the trust; (b) continuation of the trust on its existing terms is impracticable or wasteful; or (c) the value of the trust is insufficient to justify the cost of administration or to achieve the settlor's tax objectives.

Front 51

What is reformation with regard to trusts and when might a court order it?

Back 51

Reformation is when the court changes the terms of a trust to reflect the settlor's intent if a mistake in the terms is shown by clear and convincing evidence.

Front 52

When may a trust be terminated for being uneconomical?

Back 52

When the trust property is less than $50,000 and the amount is unsufficient to justify the cost of administration, as long as the trustee provides the qualified beneficiaries with notice.

Front 53

What is required for a trustee to combine or divide trusts?

Back 53

(1) the trustee must provide the beneficiaries with notice and (2) the combination or division must not frustrate any purposes of the trust or impair the rights of any beneficiary.

Front 54

How may co-trustees exercise their powers?

Back 54

They must act by majority if they cannot reach unanimous decisions.

Front 55

When might a court intervene with regard to a trustee's choice to disburse or not to disburse funds in a discretionary trust?

Back 55

A court may review for abuse of discretion, and the court will intervene if the trustee fails to exercise any judgment at all.

Front 56

What are the duties of a trustee?

Back 56

(1) duty to administer the trust; (2) duty of loyalty; (3) duty to report; (4) duty to separate trust property and keep records; (5) duty to enforce claims and defend trust from attack; and (6) duty to preserve trust property and make it productive.

Front 57

What are the aspects of the duty of loyalty owed by a trustee to a trust?

Back 57

Absent court approval or express waiver in the trust instrument, trustee may not: (1) buy or sell trust assets even if the price is a fair one; (2) sell property of one trust to another trust of which she is also a trustee; (3) borrow trust funds or loan her personal funds to the trust; (4) use trust assets to secure a personal loan; (5) personally gain through her position as trustee; (6) invest in its own stock as a trust investment; or (7) compensating herself for services rendered to the trust (except that she may be entitled to additional compensation for services rendered)

Front 58

What is the remedy if a trustee breaches his trust duties?

Back 58

If the trustee commits or is about to commit a breach of trust duties, the court may (1) enforce specific performance of the trustee's duties, (2) enjoin the trustee from committing a breach of trust, (3) compel the trustee to pay money or restore the property, or (4) suspend or remove the trustee.

Front 59

To what damages are beneficiaries owed for breach of trust?

Back 59

Trustee is liable for the greater of the amount necessary to restore the trust property and distributions to what they would have been absent the breach or (2) the trustee's profit from the breach.

Note: a trustee is liable to a beneficiary for any profit arising from the administration of the trust, even if there was no breach.

Front 60

When might a trustee not be liable for breach?

Back 60

If (1) she acted in reasonable reliance on the terms of the trust or (2) the beneficiary consented to the conduct, released the trustee from liability, or ratified the transaction, so long as the beneficiary was not improperly induced.

Front 61

When are exculpatory clauses void?

Back 61

Exculpatory clauses are void if they (1) relieve the trustee of liability for breach of trust committed in bad faith or with reckless indifference or (2) appear in the trust instrument because of the trustee's abuse of a confidential relationship with the settlor (unless he can show that the clause is fair and was adequately communicated to the settlor)

Front 62

May a beneficiary bring suit directly for damages to trust property against third party tortfeasors?

Back 62

No - the trustee must bring suit except if the trustee (1) participated in the breach, (2) has left the jurisdiction and no successor trustee is appointed, or (3) fails to sue a third person liable in tort or contract.

Front 63

Which expenses are charged to income in a trust?

Back 63

One half of the regular compensation oof the trustee and of any person providing investment advisory or custodial services to the trustee; one-half of all expenses for accountings, judicial proceedings, and other matters affecting both income and remainder interests; the entire cost of ordinary expenses; and insurance premiums covering the loss of a principal asset.

Front 64

Which expenses are charged to principal in a trust?

Back 64

One-half of the compensation of the trustee and any person providing investment advisory or custodial services to the trustee; the remaining one-half of all expenses for accountings, judicial proceedings, and other matters affecting both income and remainder interests; payments on the principal of a trust debt; expenses of a proceeding that concerns primarily an interest in principal, estate taxes, and disbursements related to environmental matters.

Front 65

What is the test for distinguishing a will from a revocable inter vivos trust?

Back 65

The test is whether the transfer creates some present gift, even if that gift is of a future interest subject to divestment.

Front 66

Are lifetime transfers subject to the elective share of a grantor-spouse?

Back 66

Not generally, except if the grantor-spouse retained the power to revoke or to invade, consume, or dispose of the principal.

Front 67

What is a pour-over gift to a trust?

Back 67

A pour-over gift allows a settlor to establish a trust which remains unfunded during the settlor's lifetime provided that the trust will be funded by settlor's will and settlor's will clearly identified the trust in its language.

Front 68

What is a Totten trust?

Back 68

In a Totten trust, a bank account depositor declares himself trustee of the account for a person who is to receive the money in the account at the time of the depositor's death, but the depositor retains full control of the money in the account during his lifetime.

Front 69

Are Totten trusts revocable? If so, how?

Back 69

Yes, a totten trust is revocable by: (1) the withdrawal of funds; (2) any lifetime act manifesting the intent to revoke; and (3) a specific contradictory provision in a will.

Front 70

Does a Totten trust protect the funds in the trust from settlor's creditors?

Back 70

No

Front 71

When will a resulting trust be implied?

Back 71

There are three types: (1) purchase money resulting trusts, which arise when X furnishes consideration for the acquisition of real or personal property but with X's consent, title is taken in Y's name (unless a close relationship exists between the parties, in which case gift is assumed); (2) resulting trusts arising from a failure of an express trust; and (3) resulting trusts arising from an incomplete disposition of trust assets

Front 72

What is a constructive trust?

Back 72

It is not really a trust - it is an equitable remedy to avoid unjust enrichment arising from wrongful conduct such as undue influence, fraud, or breach of a fiduciary duty.

Front 73

What are the trustee's duties in a constructive trust?

Back 73

The only duty of the trustee is to deliver the property to the beneficiary(ies).

Front 74

What is the burden of proof to establish a constructive trust?

Back 74

Clear and convincing evidence

Front 75

Under what circumstances might a constructive trust arise?

Back 75

(1) theft or conversion; (2) fraud or duress, (3) breach of fiduciary duty; (4) homicide; or (5) breach of promise where there is (a) a fraudulent promise; (b) a breach of a promise by someone with a confidential relationship; (c) breach of a promise by the decedent's devisee or heir to hold property for the benefit of a third person; (d) breach of promise by the decedent to devise property to one rendering services in reliance thereon; or (e) breach of promise to the debtor by the buyer what the foreclosure sale to hold the property for the debtor, causing the debtor to forgo bidding at the sale

Note: (d) and (e) are excluded if damages are adequate